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July 1, 1037
The Board

Hearin s on H. i. 7186

Mr. Cherry, Assistant Counsel*

The Committee on Banking and Currency of the House resumed
hearings this morning on the bill H.R. 7136 which extends for two years
the authority of member banks and insured banks to pay interest on
demand deposits of public funds in cases where the payment of interest
is required by State law.
Mr* R. M. Haynes, Chairman of the Legislative Committee of
the American Bankers Association, read a prepared statement, a copy of
which I obtained and is attached hereto. He strongly urged that the
bill be not enacted. The main points of his argument were as follows t
That ample time had already been provided for the states to oonform
their laws to the Federal law} that there were only six States which
had not attempted to correct their laws in this respect) that a further
extension of the time would be unfair to all other States; that the
payment of interest on demand deposits was contrary to sound banking
principles} that interest on deposits is one of the largest expenses of
banksf and that because of changed conditions whereby the assets of
banks consist largely of bonds and short term securities their earnings
have been diminished and for this reason it is a serious hardship for
banks to pay interest on demand deposits. He also pointed out that
there was no interest paid on demand deposits of Federal funds and
therefore there was no reason why interest on demand deposits of State
funds should be paid.
Mr. Haynes also read a letter from Mr. Robert V. Fleming,
President of Riggs national Bank, stating that he had read the statement submitted by Mr. Haynes and was in thorough agreement with it,
and further stating that the maintenance of a sound banking system
must prohibit payment of interest on all demand deposits. He urged
that no further extension of time on demand deposits of public funds
be granted.
Mr* A. L. M« Wiggins, a banker from Hartsville, South
Carolina, also testified. He stated that competition among banks to
receive deposits of public funds was disastrous} that in many cases
those banks which offered to pay the highest rate were the ones which
vrore less suited and able to handle the accounts, and that in such
oases the high rate paid causes the bank to invest in unsound securities*
He staged that the abolition of the payment of interest on demand
deposits is an essential fart of the banking structure as strengthened
by Congress by the Banking Acts of 1933 and 1935) that there must exist
a peculiar situation if an exception in this respect is to be imde; that
there is no reason to make a distinction between public funds and other

the Board - 2

funds; and that there i s no justification for a departure in favor of a
snail class (public funds) particularly when such funds are also secured
by collateral. He stated that the present tliae i s en <3x©ell©nt time to
end payment of interest on a l l doaand deposits; that the States h v had
ample time to adjust their laws; awd that there will be less inconvenience
and loss if the prohibition upon the payment of interest on darsand deposits
of public funds t;oe» into ©ffoot turn*
Kr» Cudlipj Counsel for the Idolxigan Bankers Association*
testified briefly* lie concurred in a l l that Lr« ..aynes li&d said ajid
urged tiiat no further extension of time be granted* lie also stated th&t
among the provisions of the nms kichig&n Bimdng C d mhich ^oes into
effect on July 1 there is a provision prohibiting the receipt by public
officers of Interest on demand deposits of public funds and also a prohibition upon £t&te banks paying interest on d<&mnd deposits*
In my opinion those three gentlo&aa nswie very favorable l»»
prci^ioas upon the ^<3C| their tesitmony was clour, concise» and
The Ccffaoitt©^ adjourned until next -thursday, J^ly 8, at
which tin© i t hopes to conclude hearings on this quastion.

Alfred K« lierry,
Assistant Counsel*

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